Hesham Mekawi predicted increased global demand for oil and gas on the basis of global economic growth of 2.7% this year

The Government’s ambition was to make Egypt a leading regional oil and gas hub

By – Karin van Wesep

Events & Marketing Manager

The Chamber and Egyptian British Business Council hosted Egypt’s Minister of Petroleum HE Eng Tarek El Molla at a Breakfast Briefing at the RAF Club in London on Monday 23 January. The event was moderated by Baroness Symons with a valuable introduction provided by Hesham Mekawi, Chairman of BP Egypt.
Hesham Mekawi predicted increased global demand for oil and gas on the basis of global economic growth of 2.7% this year and an oil price assumption of $50-60 per barrel. He expected a significant increase in investment in Egypt. BP’s investment in Egypt was its highest in any country in the world, not least because it found in Egypt the right partnership, with government, which allowed it to address challenges as they arose. Egypt’s production would triple by 2020 and its gas supply would outstrip domestic demand.

Tarek El Molla said the Government’s ambition was to make Egypt a leading regional oil and gas hub. He argued that it could achieve this objective because of its strategic location close to major sources of production and its development of the necessary infrastructure, flexible legal framework and appropriate domestic pricing policy through continuing subsidy reform (which included safety nets for lower income groups).

He pointed to his Ministry’s new strategy for modernization of the sector and the clear roadmap it would provide. The Ministry worked in partnership with IOCs and shared production 50/50 with them. Total downstream investment was expected to reach $14 billion, including two new petrochemical plants now under way at a cost of $4 billion. The Ministry had further concluded 76 new upstream agreements on the development of 21 off- and onshore blocks. Production from the major new Zohr gas field would begin by the end of 2017.

The Minister confirmed that most oil production came as ever from the Western Desert which still offered new opportunities. The Minister invited delegates to attend the Egypt Petroleum Show (EGYPS, www.egyps.com) in Cairo from 14-16 February (conveniently overlapping with the EBCC/EBBC delegation’s visit).

Growth in Daily Gas Production

Daily gas production had increased from 3800 mcfd to 4450 mcfd now, and would grow to 5,800 mcfd by 2018; the Minister expected Egypt to realise self-sufficiency in 2019 and to start exporting in 2020.
Sector Reform to Improve the Investment Environment
In answer to questions, he pointed out that oil & gas was a mature sector, allowing new investors to research it before they visited Egypt and to identify the key role of the Egyptian General Petroleum Corporation (EGPC). There were also 5 to 6 EGPC subsidiaries – such as Petrojet – which operated overseas as well as in Egypt, and did so through JVs. These worked well; BP used to enter JVs with other IOCs but had now switched to Egyptian partners who were familiar with the environment, took little time to set up – and were more cost-effective.
The Government was improving the investment process to attract more investors, including SMEs: the new investment law was not only better than its predecessor but also allowed increased flexibility.
There were large potential opportunities for investment in the mineral resources sector (phosphates, iron, sands) but its inherited old style public sector structure was not yet fit for purpose yet. Sector reform, modernisation and restructuring were a priority before investors would find it attractive. He was taking consultancy advice. A new mineral resources law was passed in December 2014, but not everyone was content with the executive regulations issued subsequently.
Capacity building in the domestic oil & gas industry was a priority and preliminary work had been carried out with management consultancy firm McKinsey. But capacity building was currently still at the programme design stage and implementation had not yet begun. There was a particular gap at middle management level. However, work done on design had already stimulated enthusiasm and created a palpably more positive attitude in the industry over the last 3 to 6 months
Egypt’s Petroleum Ministry Arrears to IOCs
The Ministry’s arrears to IOCs and suppliers had been reduced to $3.5 billion and continuing efforts were needed to assure uninterrupted supply. The Minister suggested it was an achievement to have kept the sector debt to $3.5 billion given that the Government had to pay a continued flow of new invoices and still imported 35% of Egypt’s market needs. Hesham Mekawi commented that new production would equal total current production and the consequent $6 billion saving from import substitution would underpin a continuing investment cycle – giving IOCs confidence in the eventual settlement of their arrears.
The Road to Self-Sufficiency
A new oil refinery and additional hydro crackers at existing refineries would in principle end the need to import product by the end of 2019. But the need for feedstock would require the continued import of crude. The Minister expected an annual reduction of 10% in crude imports, saving $10 billion a year at current prices.
Domestic consumption would reduce as local production and refining capacity increased, efficiency was enhanced and subsidy reform delivered a realistic pricing structure. While devaluation had multiplied the price impact of the energy subsidy, the Minister noted that the Government provided a safety net for those affected by inflation. Subsidy reform was a five-year programme with three years remaining.